Study Shows U.S. Securities Class-Action Lawsuits Down Sharply

The number of U.S. securities fraud class-action lawsuits dropped last year, a study released Tuesday found, even as investors pursued a new avenue of litigation involving the timing of stock options grants at big companies.

Federal securities fraud class actions plunged 38% to 110 last year based on filings through Dec. 11, compared with 178 lawsuits in 2005 and as many as 267 in 2002, according to a study by Stanford Law School and Cornerstone Research, a research firm for litigators.

Filings are at the lowest level since Congress passed a major class-action reform law in 1995, the study said.

The declines come even as a new area emerged for investor lawsuits -- fraud cases related to options awarded to top corporate executives. Twenty options-related lawsuits were filed in 2006 against companies such as Apple Computer, UnitedHealth Group and Juniper Networks.

There is no single reason for the overall drop, but increased corporate enforcement activity by the U.S. Securities and Exchange Commission and the Justice Department is a likely explanation, said Stanford law professor Joseph Grundfest.

"One explanation is that there is simply less fraud in the market," he said. The stock market also has been strong recently, though "it will take us several years to figure out whether that is really the cause of the decline," he added.

The report comes as class-action lawyers are under heavy fire from business interest groups and politicians who argue that shareholder litigation is growing out of control.

Class-action lawyers have been dealt some big blows, including a December ruling by a federal appeals court that said 12 securities firms will not have to face a class-action suit accusing them of manipulating the pricing of initial public offerings in the late 1990s.

The report released on Tuesday found that when class-action suits are filed, the dollar amounts at stake are often smaller than they were in prior years. Alleged investor losses, measured by stock market declines at the time the fraud allegations were disclosed, fell 44% to $52 billion in 2006, from $93 billion in 2005.

Proponents of class-action reform say the report shows no evidence that the trends are here to stay. In a statement, the U.S. Chamber of Commerce said that "although we applaudthe decrease in filings, there is still a long way to go to fix a broken securities litigation system, in which shareholders basically end up suing themselves with the lawyers raking huge sums off the top."

Separately on Tuesday, a survey of large U.S. companies from BTI Consulting Group found that these businesses spent $56.4 billion on outside counsel last year, up 19.6% from 2005.

The Chamber of Commerce said the fall-off in lawsuits can partially be attributed to the travails of once dominant class-action litigation firm Milberg Weiss Bershad & Schulman LLP, which was indicted in May on criminal charges that it paid kickbacks to plaintiffs.

Milberg, which has denied the charges, filed 73 fewer cases in 2006 than in 2005, according to the Chamber of Commerce.

But the study from Stanford and Cornerstone said the Milberg indictment probably had no big impact on the overall decline in class-action lawsuits. "There is no shortage of plaintiffs' lawyers in the United States and there are no barriers to entry," Grundfest said. "All of the lawyers that know how to file these cases are still in business."

While the number of new class actions is declining, another report released on Tuesday showed that the size of settlements of existing cases is getting bigger. The report from NERA Economic Consulting said that the average shareholder class-action settlement rose to $86.7 million last year, up from $73.6 million in 2005.